On March 8, 2017, the US Bankruptcy Court for the District of Delaware (Judge Gross) ruled on an objection to the fees and expenses of the Indenture Trustee for the 7.875% Senior Notes due 2026 (the “Notes”) of Nortel Networks Capital Corporation. (A copy of the decision is accessible here.)

The Indenture Trustee had served on the Official Committee of Unsecured Creditors in the Nortel cases. The objection was filed by two noteholders representing 90% of the Notes. The Noteholders’ objected to approximately $4.4MM of the total of $8.1MM in fees and expenses sought by the Indenture Trustee for itself and its counsel.

The Noteholders objected to two categories of fees and expenses. First, they objected to fees they characterized as duplicative of the work done by Committee counsel and, second, to fees incurred by the Indenture Trustee and its counsel with respect to issues in the case that the Noteholders argued were unnecessary for the Indenture Trustee to address because they would not directly benefit the Noteholders. The Noteholders did not challenge the quality of the work done by the Indenture Trustee’s counsel, the results obtained or the hourly rates.

The Court overruled most of the objections. It upheld an objection to a portion of the fees of one law firm, where that firm was replaced during the case and some of its work had to be duplicated by a successor firm. It also ruled that it was unreasonable for the Indenture Trustee to have had more than one lawyer at each Creditors’ Committee meeting and disallowed the fees and expenses claimed for additional lawyers.

There are several important takeaways from the decision. First, the decision approved the practice of Indenture Trustees to participate on Creditors’ Committees and take an active role in bankruptcy cases in order to protect the interests of holders. Second, the Court refused to second-guess the Indenture Trustee’s judgment as to the legal issues requiring the attention of its counsel and rejected the Noteholders' argument that issues addressed by Committee counsel should not have been independently reviewed by the Indenture Trustee’s counsel, finding that “[t]he matters at hand were too important to leave to chance that Committee work would have no impact on or significance to the Notes”. In doing so, the Court distinguished on the facts a prior decision of the US Bankruptcy Court for the District of Delaware (Judge Walrath) that had found a significant portion of the legal fees of Indenture Trustee’s counsel were not reasonable as such counsel's work was duplicative of Committee counsel's work in a case that (unlike Nortel) was not complicated.1 The Court refused to engage in “Monday morning quarterbacking”, noting that whether the Indenture Trustee acted with prudence (which the Court acknowledged is the applicable standard under the Indenture and New York law) is not something the Court can readily review in hindsight and that the Indenture Trustee’s judgment must only be informed or prudent at the time it acted. Third, the Court found that the Indenture was a contract entitling the Indenture Trustee to be paid for its fees and expenses in defending against the fee objection (an exception to the American Rule that each party pays for its own attorney’s fees). Fourth, the Court found that by submitting detailed time records the Indenture Trustee and its counsel satisfied their prima facie burden to establish their entitlement to the requested fees and that the burden shifted to the Noteholders to provide evidence of the inappropriateness of the fees, which they had failed to do except as to the attendance of multiple lawyers at meetings. Finally, the decision is a caution to counsel for indenture trustees not to send multiple lawyers to meetings without some good reason for doing so.

1 In re Worldwide Direct, Inc., 334 B.R. 112 (Bankr. D.Del. 2005)(disallowing fees of indenture trustee found to have been duplicative of the work of committee counsel in a case where the debtor’s assets were sold during the first few months after the petition and a liquidating plan was confirmed)